Choosing a Payroll Service Provider

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By Dave Foxall

Making the Right Outsourcing Choice

Once an organization has made the decision to outsource payroll, it faces a much more complicated dilemma: which payroll service provider to choose. A simple Google search for “payroll provider” yields in the region of 193,000,000 results. Obviously not every result represents a provider, but this figure gives a feel for the amount of payroll outsourcing information and opinion available. Jimmy Desai, outsourcing specialist at London legal firm, Blake Lapthorn points out, “outsourcing arrangements can be confusing. It is not all about headline price and size. You need to consider the detail of the contract: what kind of voice will the customer have; will the supplier react quickly to issues or will you be left hanging? It is possible to make some very expensive mistakes if you rush in without giving the details full consideration.” Add to this that a service provider will have access to the business’s most valuable data - employee and financial information, even company banking details – and choosing a service becomes a matter of some due diligence and careful trust. What follows are the fundamental issues for service provider selection.

Payroll Provider Issue #1: Know Your Needs

Ken Darrow, editor of Payroll for Dummies says, “There's three things that payroll should do for you. It pays employees on time, it pays your payroll taxes on time, and it actually files your payroll tax forms on time. You want to do all three of those to be compliant with the law, and you also better do the last two or you'll get fined.” Of the many surrounding payroll outsourcing questions floating around though, few organizations dig deeper to ask what else is it that we need from a provider, (in addition to those three fundamental services)? Do you need a company that can handle different state and federal taxes? Do you need HR services on top of payroll? Do you need them to take care of 401(k)s and other deductions? Do you need a non-standard pay cycle? Clarity on questions like these, in together with basic information such as workforce size and type, details of any bonus schemes, and what plans for expansion are in place for the duration of the payroll contract will help you formulate your essential requirements for a provider.

Payroll Provider Issue #2: Know What is Being Offered

The other side of the first issue is the need for clarity on what services a provider actually offers. It’s likely that Darrow’s three fundamentals are included, along with direct deposit and probably online access for a degree of self-service functionality. However, ResourceNation’s Buyer Guide to Payroll suggests that services such as end-of-year reporting, processing and mailing W-2 forms to employees, dealing with advances on any tax credits or contributions to any tax deferred savings or retirement plans may not come as standard. The bottom line is to know what the price covers.

Payroll Provider Issue #3: Standards of Service

The question of agreed standards of speed and accuracy of processing are a crucial factor in choice of payroll provider – what are the turnaround times and what is the ease of access to payroll information for those that need it? In other words, what is the quality of the customer/provider interface? There is also the issue of what arrangements are in place in the case of mistakes such as payslip errors or late tax filing which may incur government penalties. Most providers will guarantee to pay any charges incurred through non-compliance with legislation, however liability must be agreed up front and incorporated in the contract or service level agreement.

Payroll Provider Issue #4: Provider Reputation

ResourceNation’s Guide stresses that stability and reputation is an important factor when outsourcing a function as sensitive as payroll, “Remember, most companies will take money on deposit, hold it, and disburse it to your employees and to government agencies. Recent cases of fraud and bankruptcy among less established companies have forced many businesses to learn the hard way that choosing a reliable company is very important.” When engaging a provider, key questions include:

how long has the company has been in business

how many clients does it have

what functions do they perform other than payroll

on how many occasions have they paid fines in the last year

what references or testimonials can be provided

It’s worth remembering that in the US, in most states, the business owner (or corporation) is liable to employees and government agencies for payment irrespective of the actions of a third party payroll company.

Payroll Provider Issue #5: Start With the End in Mind

It may seem premature or even pessimistic, but the end of the service contract should be borne in mind. Nothing lasts forever and whether it is for reasons of service dissatisfaction or simply a change in the business needs, there may come a time that an end to the payroll relationship with a particular provider is called for. As a 2010 AccountancyAge white paper (Payroll Outsourcing) suggests, “Make sure that there are provisions to dictate what will happen on exit. Normally, these kind of contracts will have a transition to ensure a smooth handover either to you if you are taking it back in-house or to a new supplier.”

The Final Word on Choosing a Payroll Provider

As with any recruitment or procurement exercise, the key is to know what you want, understand what is available and aim for the best match between the two. Of course, other, more subtle, factors will also influence the selection decision, such as the size of the client organization compared to the provider’s other customers which will determine how influential the client’s ‘voice’ will be when negotiating (and re-negotiating) the contract. Ultimately, the best way to proceed is to ask questions; find out from other businesses, payroll companies and even banks what the experience of a particular provider has been. Part of this is about due diligence, but part of this process is simply about deciding whether to trust a provider with your payroll.

It’s worth remembering that in the U.S. (at least in most states), the business owner (or corporation) is liable to employees and government agencies for payment irrespective of the actions of a third party payroll company.”